Japanese Default
i don't see a way out for japan. their debt/gdp is now approaching 200%, debt service is 25% of their entire budget, they have an 8% fiscal deficit, and their bond dependency ratio is approaching 50%.... all of this while maintaing .97% on the ten year jgb.
japanese savings rates are continuing to decline along with labor participation. the country has the longest lifespan of nearly any country in the world and social security expense accounts for nearly 30% of the budget (nearly 25% of the population is over age 65). with a population of 127 million only 3-4 million are non-japanese, and the death rate is higher than the birth rate (the birth rate is also one of the lowest of any country in the world). with no net immigration they will have limited savings from japanese citizens and corporations to continue to finance government bonds. in addition to the japanese budget woes the cost of the fukushima disaster is still yet unknown, but estimates range from 250 billion to several trillion dollars.
japan will soon need to look for external financing from the eu, the u.s., or asia. when this happens- and it will have to happen soon- rates will begin to rise. from the numbers illustrated above even a 50-100 basis point move would mean the end for japan.
initially i thought they would inflate their way out, but japan imports 60% of its caloric food intake and has limited natural resources (oil, nat gas, and mineral resources are scarce). they would be unable to acquire the raw material inputs and meet the energy needs that are required in the production of autos and consumer electronics which are both vital to the economy.
i have been reading budget reports from the japanese ministry of finance, data from cia, and demographic research for two weeks now... i am legitimately scared... it wasn't long ago when greek bonds traded in a narrow range with the germand bond. would you be long a jgb cds?
sounds like Kyle Bass agrees with you. Question is what is the best way to play this in the market? Any trader out there want to help an ignorant investor like me?
They print their own money.
That's part of the problem, not the solution.
Not only do they print their own money, but most of the government debt is held by domestic banks and corporations. Besides, they have the second largest stockpile of reserves after China and a current account surplus... Have to wait to see their trade surplus turn negative and reserves to decline before you can make a short call... As to aging population - common, they are Japanese, they will build more robots to do stuff and will "retire" to R&D jobs after graduating from college.
the trading floors are littered with the bodies of those who have tried to short JGBs in every way you can imagine
Same argument for half a decade. Question is when?
Also, I wouldn't disregard the ability to print. Especially for a county which struggles to achieve inflation.
Jpy has weakened a lot over the past few weeks. I prefer selling jpy because if the central bank buys a large amount if jgbs like the fed does with treasuries, bond prices might not move while fx gets much weaker, and every one in japan wants weaker fx. I made a lot of money recently selling jpy and if the global recovery continues I see no reason for that to change.
japan is not going to default because they can print unless the EU....
that being said, the best way to play it might be just catch an opportunity to short yen when you see it spiking up. japan HAS TO print to service it's debt and make its economy to grow so you are kinda in for a long haul.
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